Whither Dodd-Frank?

Wonkblog @ WaPo:

Sunday is the third anniversary of the Dodd-Frank Act. To get a sense of how

implementation has been going, I asked 16 people at the forefront of the debate to answer two questions: What has gone better than you had expected? And what has gone worse? – Mike Konczal

Sheila C. Bair served as the 19th chairman of the Federal Deposit Insurance Corp. for a five-year term, from June 2006 through June 2011.

“Things that went better than expected: just about all of the rules where an agency could act alone, e.g., the FDIC’s rules on resolution authority and deposit insurance premiums; the CFPB’s rules on mortgage lending standards; the CFTC’s rules on moving standardized domestic swaps to centralized clearing.

“Things that were bigger problems than expected: just about all of the rules where inter-agency coordination and agreement were required: e.g. tougher bank capital standards, the Volcker Rule, risk retention for securitizers. Between agency squabbling and industry lobbying, Sisyphus could move faster than the agencies in moving these rules.”

Michael S. Barr is a  professor of Law at the University of Michigan Law School and former assistant secretary of the treasury for financial institutions, where he was a key architect of the Dodd-Frank Act.

“The opponents of financial reform are losing. There’s a strong, new Consumer Financial Protection Bureau, looking out for American households, and Senate Republicans finally relented and confirmed, by a lopsided vote, Rich Cordray as director of the bureau.

Capital requirements are going up, derivatives are coming out of the shadows and major financial firms will be subject to strict supervision and wind-down authority regardless of corporate form. But much remains to be done, from LIBOR reform to the Volcker Rule, and the financial industry will continue to try to lobby, litigate and legislate their way out of the tough new rules. Now is not the time to lose hope, stop fighting or give in, but to renew the commitment to making the financial system fairer and safer.”

Bernanke: Congress itself poses the greatest risk to growth

Binyamin Applebaum @ NYTs:

WASHINGTON — The Federal Reserve’s chairman, Ben S. Bernanke, emphasized on Wednesday that the central bank remains committed to bolstering the economy, insisting that any deceleration in the Fed’s stimulus campaign will happen because it is achieving its goals, not because it has lowered its sights. 

Mr. Bernanke said he still expected to reach that point in the coming months but, in what may have been his final appearance before the House Financial Services Committee, he cautioned that Congress itself posed the greatest risk to growth. 

“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he told the committee. 

The sluggish economy has been a constant background for Mr. Bernanke’s biannual testimony. Unemployment, at 7.6 percent, remains stubbornly above the Fed’s goals. 

Inflation has sagged to the lowest pace on record. Growth continues at a “modest to moderate pace,” the Fed said Wednesday in its monthly beige book survey of economic conditions across the country, released separately from Mr. Bernanke’s testimony.

"A Call to Battle on Bank Leverage"

Former chief IMF economist Simon Johnson @ NYT's Economix:

On Tuesday, federal banking regulators opened an important new phase of the debate on how safe very large financial institutions should become. The next round of argument will be intense; the focus has shifted to the specific and high-stakes question of how much leverage big banks can have – i.e., how much of each dollar on their balance sheet they should be allowed to fund with debt rather than with equity.

The people who run global megabanks would rather fund them with relatively more debt and less equity. Equity absorbs losses, but these very large companies are seen as too big to fail – so they benefit from implicit government guarantees. A higher degree of leverage – meaning more debt and less equity – means more upside for the people who run banks, while the greater downside risks are someone else’s problem (the central bank, the taxpayer or, more broadly, you).

"Income, Race and Voting

Professor Krugman ventures into Poli Sci, @ NYTs:

Still thinking about the new GOP idea — hey, let’s go for white voters! Why didn’t we think of that before? ... I’m venturing into political science territory here,and would be happy to have real experts weigh in; but I’m pretty sure I have the basics right here.

So, let’s look at some exit poll data, and cross-tab it with Census income data. In the figure below, the red lines show the income-voting relationship from the Times summary of exit polls, which also supplies the broad ethnic group data. For incomes, I use Census data on median household income for 2011, which is also available for regions. For voting I use Alabama to represent the South, Ohio to represent the Midwest.

So here’s my picture:

Contrary to what some people keep saying, people with higher incomes, other things equal, tend to vote Republican. Cut through the noise and fog, and it is true that Democrats broadly want to redistribute income down, and Republicans want to redistribute income up — and on average, voters get that (which is why “libertarian populism” is hot air). But race and ethnicity also matter, a lot. What you can see right away is that there are three groups that are fairly anomalous.

"The Lagging Public Sector"

Floyd Norris @ NYT's Economix:

Private sector employment in the United States is growing at about the same rate it did during the best days of the last decade.

The difference is in the government. It continues to shed workers.

Source: Bureau of Labor Statistics, via Haver Analytics  Year-over-year change in employment.

The above chart shows the annual change in employment for the private sector, and for government jobs, since the end of 2002.

Over the last 12 months, private sector employment rose 2 percent. That is down a little from the 2.5 percent rate early last year, but it is about the same as the rate of growth in the fall of 2005.

But government employment continues to fall. It is down 0.2 percent, which is the best year-over-year showing since 2009, when the government cutbacks were starting to be felt.

On a monthly basis, over the last 12 months the economy added an average of 191,000 jobs a month in the private sector, and cut public sector employment by 3,000 jobs a month.

Politicians lamenting the slow pace of recovery might, logically, look for ways to increase hiring in the sector that is lagging the most.

(A note on the data: I used figures before seasonal adjustments, which is possible since annual changes presumably take care of seasonal adjustment. And I dropped from the numbers the temporary surge in government jobs caused by hiring for the 2010 census. Without that change, there would have been a rise in government employment in 2010 and a much steeper decline in 2011.)

Infrastructure repair is key to growth

 Barry Ritholz @ The Big Picture:

If you have spent much time traveling around the United States, you likely have noticed that our infrastructure looks a bit worn and tired and in need of some refreshing. If you spend much time traveling around the world, however, you will notice that our infrastructure is shockingly bad. So bad that it’s not an exaggeration to declare it a national disgrace, a global embarrassment and a massive security risk.Not too long ago, the infrastructure of the United States was the envy of the world. We had an extensive interstate highway system, deep-water ports connected to a well-developed rail system and a new airport in every major city (and most minor ones). Electricity was accessible to the vast majority of the nation’s residents, as was Ma Bell’s telephone network.

That was then. In the ensuing decades, we have allowed the transportation grid to get old and out of shape. Our interstate highway system is in disrepair; our bridges are rusting away, with some collapsing now and then. The electrical grid is a patchwork of jury-rigged fixes, vulnerable to blackouts and foreign cyberattacks. The cell system of the United States is a laughingstock versus Asia’s or Europe’s coverage. There are very few things that are done better by government mandate than by the free market, but cell coverage is one of them. Broadband, almost as laughable as our cell coverage, is another.

"The Always Wrong Club"

Paul Krugman, via Floyd Norris, rounds up the usual suspects:

Aha. Floyd Norris reminds us of the 23-economist letter from 2010, warning of

dire consequences — “currency debasement and inflation” — from quantitative easing. The signatories are kind of a who’s who of wrongness, ranging from Niall Ferguson to Amity Shlaes to John Taylor. And they were wrong again.

But that won’t diminish their reputations on the right, even a bit. How do I know that? Well, also on the list — presumably because they asked him to be there — is Kevin Hassett, co-author of Dow 36,000 and also a prominent denier of the existence of a housing bubble. Fool me once, fool me twice, fool me yet again — hey, never mind.

Quite amazing.

"What to Do with the Hypertrophied Financial Sector?"

Definition:
hy·per·tro·phy  (hi-pûr-tro-fe)

n. pl. hy·per·tro·phies

A nontumorous enlargement of an organ or a tissue as a result of an increase in the size rather than the number of constituent cells.

intr. & tr.v. hy·per·tro·phied

To grow or cause to grow abnormally large.

Economist Brad DeLong:

Back in 2011, I wrote:

In 1950, finance and insurance in the United States accounted for

2.8% of GDP…. Today, it is 8.4% of GDP…. If the US were getting good value from the extra 5.6% of GDP that it is now spending on finance and insurance--the extra $750 billion diverted annually from paying people who make directly useful goods and provide directly useful services--it would be obvious in the statistics… diverting that large a share of resources away from goods and services directly useful this year is a good bargain only if it collectively has a substantial amount of what financiers call "alpha", only if it boosts overall annual economic growth by 0.3%--or 6% per 25-year generation….

Why has the devotion of a great deal of skill and enterprise to finance and insurance sector not paid obvious economic dividends? There are two sustainable ways to make money in finance: find people with risks that need to be carried and match them with people with unused risk-bearing capacity, or find people with such risks and match them with people who are clueless but who have money…

Over the past year and a half, in the wake of Thomas Philippon and Ariel Resheff's estimate that 2% of U.S. GDP was wasted in the pointless hypertrophy of the financial sector, evidence that our modern financial system is less a device for efficiently sharing risk and more a device for separating rich people from their money--a Las Vegas without the glitz--has mounted. Bruce Bartlett points to Greenwood and Scharfstein, to Cechetti and Kharoubi's suggestion that financial deepening is only useful in early stages of economic development, to Orhangazi's evidence on a negative correlation between financial deepening and real investment, and to Lord Adair Turner's doubts that the flowering of sophisticated finance over the past generation has aided either growth or stability.

Inflation is too damned low!

We constantly hear noise about the inflation bugaboo. Not because we're experiencing inflation, but because it's a convenient scare word in certain circles wedded to the economics of austerity. But, of course, inflation is the least of our problems - in fact, if anything "inflation is too damned low!"

Binyan Applebaum @ The New York Times' Economix shows that "Yes, We Have No Inflation":

 

      Source: Bureau of Economic Analysis 

Inflation remained sluggish in May. Prices continued to rise at the slowest pace in at least half a century, up just 1.1 percent over the previous year, the Bureau of Economic Analysis said Thursday. While some other measures of inflation are rising a little more quickly, the Federal Reserve regards this one as most accurate.

Slow inflation may sound like a good thing, but it’s not. Particularly not now.
Economic research suggests that inflation is best in moderation. Price increases lead to wage increases, which makes it easier to repay existing debts, like mortgages, and more attractive to incur new debts, like borrowing to start a company.

Inflation also functions as a kind of economic WD-40, easing shifts in the allocation of resources.  It is easier for struggling companies and industries to adjust by withholding cost-of-living increases than by seeking to impose wage cuts.

Perhaps most importantly, moderate inflation keeps the economy at a safe distance from deflation, or general price declines, which can freeze activity as would-be buyers wait for lower prices. Such a buffer would be particularly valuable now because the Fed is already stretching the limits of its ability to stimulate the economy, leaving the United States unusually vulnerable to any new shocks...

"How Austerity Has Failed"

Martin Wolf @ New York Review of Books focuses on Europe's massive policy failure:

Austerity has failed. It turned a nascent recovery into stagnation. That imposes huge and unnecessary costs, not just in the short run, but also in the long term: the costs of investments unmade, of businesses not started, of skills atrophied, and of hopes destroyed.

What is being done here in the UK and also in much of the eurozone is worse than a crime, it is a blunder. If policymakers listened to the arguments put forward by our opponents, the picture, already dark, would become still darker.

How Austerity Aborted Recovery

Is Ben Bernanke abandoning the real economy?

 Economist Jared Bernstein worries about the Fed Chairman:

OK, clearly the markets aren’t listening to me—not exactly a surprise.  But they’re not

listening to Ben either, who’s been saying that the economy’s getting a bit better, so interest rates are going up.  And at some point, sooner than later, he and his buds are going to start adding a bit less juice to the punch bowl.  Surely, markets, (he’s saying) you didn’t think this easy money party was going to last forever?  After all, central banks in healthy economies don’t have $3.4 trillion balance sheets and hold rates at zero.

Here’s a little sample of what’s on the wires re markets and Ben right now—if they were going out, they’d need couples’ therapy (“Markets, I think Ben is trying to tell you something…can you tell Ben why you’re having trouble hearing him?”).

Bernanke and Markets, Crazed and Confused

Bernanke Speaks, and Markets Tumble

Bernanke Sneezes, Global Markets Catch a Cold

So I don’t really know what to make of the markets and I suspect they’re just going to be volatile for a while.  Like I said yesterday, it’s the real economy I’m worried about, and I used to have a friend in Ben when it came to that.  Now, I’m not so sure.

OMFG - Niall Ferguson opens his mouth again!

Niall Ferguson, that stain on Harvard University's increasingly shaky reputation, was last seen attacking John Maynard Keynes for "the gay." He's back - Dean Baker does the debunking:

Harvard's standing in economic policy debates took a big hit when the famous Reinhart-Rogoff 90 percent debt-to-GDP growth cliff was shown to be the result of a simple spreadsheet error. Niall Ferguson's strange rant in the Wall Street Journal about the United States becoming the land of government regulation continues the downhill slide.

The gist of the piece is that the country is going down the road to economic stagnation and suffocating bureaucracy because of excessive regulation. The Affordable Care Act (ACA) is the main villain in this story.

It's fair to say that just about everything in the piece is wrong. Starting with the meat, rather than being some horrible burden for small businesses, the main effect of the ACA on the vast majority of small businesses will be to provide them with a subsidy if they offer their workers insurance. The mandate only applies to firms that employ more than 50 workers, most of whom already provide insurance that would meet the mandate anyhow. So these engines of innovation will grind to a halt if the government offers them subsidies for insurance? Interesting theory.

Ratings Agency Fraud & the Financial Crisis - Who knew?

Matt Taibbi talks with Chris Hayes about the collusion between ratings agencies
and banksters that fueled the financial crisis.  The question remains - will anyone
go to jail for this fraudulent conspiracy?  Not likely.

Visit NBCNews.com for breaking news, world news, and news about the economy

Stephen Colbert explains the current housing market

Taxes and income inequality

Kevin Drum @ Mother Jones:

Here's a remarkable chart from EPI. Actually, no: Strike that. It's true that in a normal world it would be remarkable, but in the world we live in it's actually totally unsurprising. It illustrates the rise in income inequality over the past three decades (top dark blue line),  and as you can see, it's been rising steadily. Totally unsurprising.

But then author Andrew Fieldhouse did another calculation. The middle blue line shows rising inequality after you account for taxes and transfers. But what if we had the same tax system we did in 1979? Well, inequality still would have gone up, but it would have gone up significantly less (bottom light blue line). In other words, during an era in which the rich were getting richer anyway, we deliberately set out to reduce their tax burdens so that they could become even richer...

Instead of trying to ameliorate the effects of a broad economic trend, we've done everything we possibly can to accelerate it. That includes tax policy, financial deregulation, trade policy, anti-labor policy, and much more. And since there's approximately zero evidence that any of this has actually increased economic growth, it means that U.S. policy for the past 30 years has been aggressively dedicated to shifting income share away from the poor and middle class and into the pockets of the already rich...

The foreclosure horrors continue

More than a year after the national mortgage settlement over robosigning crimes, the systematic abuses continue. Bloomberg:

Bank of America Corp. (BAC), the second-biggest U.S. lender, rewarded staff with cash bonuses and gift cards for meeting quotas tied to sending distressed homeowners into foreclosure, former employees said in court documents.

Mortgage workers falsified records and were told to delay U.S. loan-assistance applications by requesting paperwork that the Charlotte, North Carolina-based bank had already received, according to statements from ex-employees filed last week in federal court in Boston. The lender improperly disqualified applicants to the Home Affordable Modification Program, or HAMP, according to a May 23 statement from Simone Gordon, a loss-mitigation specialist who left the company in 2012.

Bank of America Corp. is being sued by homeowners who didn't receive permanent loan modifications after making payments under trial programs, according to court papers. Photographer: Davis Turner/Bloomberg 

“We were regularly drilled that it was our job to maximize fees for the bank by fostering and extending delay of the HAMP modification process by any means we could,” Gordon said. Managers instructed staff to “delay modifications by telling homeowners who called in that their documents were ‘under review,’ when in fact, there had been no review,” she said.

The truth about "Job Creators"

The real "Job Creators" are the Middle Class - from Hullabaloo:

Nick Hanauer, successful entrepreneur and one percenter, gave testimony on income inequality a few days ago before the U.S. Senate. His testimony in full should be posted in every break room in America:

For 30 years, Americans on the right and left have accepted a

particular explanation for the origins of  Prosperity in capitalist economies. It is that rich business people like me are “Job Creators.” That if taxes go up on us or our companies, we will create fewer jobs. And that the lower our taxes are, the more jobs we will create and the more general prosperity we'll have.

Many of you in this room are certain that these claims are true. But sometimes the ideas that we know to be true are dead wrong. For thousands of years people were certain, positive, that earth was at the center of the universe. It’s not, and anyone who doesn’t know that would have a very hard time doing astronomy.

My argument today is this: In the same way that it’s a fact that the sun, not earth is the center of the solar system, it’s also a fact that the middle class, not rich business people like me are the center of America’s economy.

"How Elite Economic Hucksters Drive America’s Biggest Fraud Epidemics"

William Black is a former bank regulator and author of "The Best Way To Rob a Bank Is To Own One"  - via Naked Capitalism:

What do you get when you throw together economic fraudsters, plutocrats and opportunistic criminals? A financial crisis, that’s what. If you look back over the massive frauds that have swept the country in recent decades, from the savings and loan crisis of the 1980s to the 2007-'08 financial crash, this deadly combination always appears.

A dangerous cycle begins when prominent economists pander to plutocrats and bought politicians, who reward them with top posts, where they promote the perverse economic policies that cause fraud epidemics. Crises develop, and millions of people are ripped off. Those who fight for truth are ignored or ruined. The criminals get wealthier, bolder and more politically powerful, and go on to hatch even more devastating cons.

The three most recent financial crises in U.S. history were driven by a special type of fraud called “control fraud” — cases where the officers who control what look like legitimate entities use them as “weapons” to commit crimes. Each time, Alan Greenspan, former chairman of the Federal Reserve, played a catastrophic role. First, his policies created the fraud-friendly (criminogenic) environment that produces epidemics of control fraud, then he failed to identify those epidemics and incipient crises, and finally, he failed to counter them.

On the lack of serious discussion or an honest opposition

Professor Krugman channels the outrage at alleged GOP "policy wonks" who are little more than ethically-challenged propagandists:

I fairly often receive mail pleading with me to take a more even tone, to have a respectful discussion with people on the other side rather than calling them fools and knaves. And you know, I do when I can. But the truth is that on most of the big issues confronting us, there just isn’t anyone to have a serious discussion with. Ezra Klein offers a nice illustration of this point today, in his takedown of Avik Roy on Obamacare in California.

The thing you want to bear in mind is that Roy is widely considered a good example of a reformist conservative, not to mention a health policy wonk. So what does this reform-minded wonk have to say about Obamacare?

Klein tries really hard to keep his temper even; too hard, I think, because I wonder how many readers will stay with him all the way through. But to cut to the chase, Roy claims that Obamacare will cause soaring insurance rates, using a comparison that is completely fraudulent — and I say fraudulent, not wrong, because he is indeed enough of a policy wonk here to know that he is pulling a fast one.

Reinhart And Rogoff's Pro-Austerity Research Now Even More Thoroughly Debunked By Studies

Mark Gongloff @ Huffington Post:

The debunking of Carmen Reinhart and Kenneth Rogoff continues.

The Harvard economists have argued that mistakes and omissions in their

influential research on debt and economic growth don't change their ultimate austerity-justifying conclusion: That too much debt hurts growth.

But even this claim has now been disproved by two new studies, which suggest the opposite might in fact be true: Slow growth leads to higher debt, not the other way around.

In a post at Quartz, University of Michigan economics professor Miles Kimball and University of Michigan undergraduate student Yichuan Wang write that they have crunched Reinhart and Rogoff's data and found "not even a shred of evidence" that high debt levels lead to slower economic growth.

And a new paper by University of Massachusetts professor Arindrajit Dube finds evidence that Reinhart and Rogoff had the relationship between growth and debt backwards: Slow growth appears to cause higher debt, if anything.